TwoSided Platforms: Pricing and Social Efficiency

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Two-Sided Platforms Pricing and Social Efficiency

• Andrei Hagiu
• Princeton University
• and
• RIETI
• October 13th 2004

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Motivation

• Many high-technology industries revolve around
  two (multi) sided platforms
• Platforms are bottlenecks for users and producers
  of complements
• Platforms control and restrict access of both
  sides of the market through prices
• Users demand a variety of complements

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Examples (cf. Evans Hagiu and Schmalensee (2004))
and many others (including shopping malls)
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TYPICAL SOFTWARE PLATFORM RELATIONSHIPS
Platform Components
Software Platform
Platform Components
Users
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WHATS DIFFERENT AND INTERESTING?

• Pricing
• Departure from price-cost relationships
• Structure matters (interesting differences)
• Platform governance
• Open platforms vs. proprietary platforms
• Strategy, Design and Technology
• Degree of vertical integration with hardware
  and/or applications
• Importance of application variety
• Openness
• Industry Dynamics
• Competition between different business models
• Competition between partially coincident or
  formerly distinct platforms (digital convergence)

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SOFTWARE PLATFORMS PRICING STRUCTURES (absolute
or price less marginal cost)
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Social efficiency

• Product diversity
• Higher or lower under proprietary platform than
  under social planner
• Comparison with open platform (Windows vs. Linux
  for example)
• Product diversity
• Social welfare

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Related Literature

• Two-Sided Markets
• Rochet and Tirole (2003) and (2004)
• Armstrong (2003)
• Product diversity, free entry and social
  efficiency
• Mankiw and Whinston (1986)
• Indirect network effects
• Church and Gandal (1992)
• Clements and Ohashi (2004)

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Outline

• Model
• Theoretical explanations of different platform
  pricing structures (videogames vs. i-mode vs. all
  others)
• User demand for variety
• User risk-aversion
• Limited supply of (high-quality) developers
• Social efficiency open vs. proprietary platforms
• Product variety
• Social welfare

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Discussion, questions and

• thank you for your attention!